Share

Russia's Gazprom Faces New Challenges

Print Text Size

Video Transcript: 

Russia's state-owned natural gas company Gazprom announced earlier this week that it would grant discounts on natural gas sales to "key buyers." This is the second round of retroactive discounts undertaken by the Russian company this year -- and it comes amidst reports that Gazprom's exports to Europe are increasing in volume, albeit at lower prices. These moves show that Gazprom is reacting to pressures, both from within Russia and from its export markets, to soften its traditionally blunt business practices -- particularly when dealing with Russia's strategic partners.

Gazprom, the largest producer of natural gas in the world, has been in one way or another, a fixture of the Russian political and economic power structures since its inception in 1989. The state company survived the chaos that followed the collapse of the Soviet Union, the rampant corruption and inefficiencies of the mid-90s, several rounds of haphazard privatization and the draconian reforms mandated by Boris Yeltsin during his first presidency. Gazprom not only survived but thrived throughout these challenges, bolstered by Europe's seemingly endless appetite for large quantities of Russian natural gas. It was when Vladimir Putin came to power in 1999 that he focused on consolidating the natural gas sector under Gazprom in order to bolster its capability to dominate the market. In the mid and late 2000s, Gazprom was even one of the key instruments of Moscow's aggressive resurgence in its periphery -- especially as Ukraine veered dangerously close towards NATO and the West.

In the past two years, however, Gazprom has faced one of the biggest challenges in its 24-year history. What Gazprom faced in the 1990s was political, but the current crisis is striking at Gazprom's very foundation. Supply cuts during the 2005 and 2009 gas wars with Ukraine encouraged Western European consumers to develop alternative sources of natural gas. And while Russia remains the primary provider of the commodity to the continent, it can no longer afford to maintain quasi-monopolistic business practices if it wants to maintain its market share.

Gazprom's announcement to offer yet another retroactive discounts to key European customers reflects the pressures on the company to remain competitive. It also underscores Gazprom's impetus to maintain its long-term contract model that is increasingly coming under strain as Europe's natural gas spot market develops. For example, E.On, a major German multinational utilities provider, recently announced it would eventually stop relying on long-term contracts with Gazprom.

Gazprom's change of strategy seems to be yielding positive results on the surface. The company announced this week that it had increased its natural gas deliveries to Europe back to normal levels after a significant fall last year -- albeit at lower prices. An economically depressed Europe is rapidly reaching its limit on the funds it can commit to expensive energy diversification projects like pipelines to the Caspian Sea or large LNG import terminals. Also, compromises emerging between Russia and Ukraine on the management of natural gas infrastructure are assuaging Europe's fears of experiencing the fallout of yet another dispute between the two countries.

However, Gazprom's future is still on shaky ground as opposition to what are seen as vast inefficiencies in the gigantic company is rising from within powerful circles of the Kremlin. Calls by rival natural gas producers to end Gazprom's export monopoly are beginning to gain traction -- especially as Russia's dynamic oil giant, Rosneft, has set its sights on the natural gas business. Gazprom is also facing steeper
competition within the Russian market itself, mirroring its challenges abroad. Only yesterday, the company announced it would remove the onerous take-or-pay provision from its contracts with domestic industrial clients. Gazprom is shifting rapidly to keep up with changes abroad, while trying to withstand attacks back at home. It is a complex game that Gazprom has managed before, though never to such a high level.

Get our free weekly Intelligence Reports

Join over 350,000 readers on our free intel reports list.

We will never sell or share your email address or information with anyone.